August 14, 2012

Are Americans better off than the Dutch?

For a lot of questions, comparisons of per-capita GDP yield the correct answer to a first-order of approximation. For example, are Americans richer than the Chinese? A comparison of GDPs per capita, adjusted for PPP differences, yields an unambiguous answer in favor of the U.S. Yes, income may be distributed more unequally in the U.S., but that is largely irrelevant. As the chart below shows, very few Chinese are richer than the poorest Americans. The distributions of income for the two countries barely overlap.

(Note these data are for 2005. The Chinese distribution has caught up some with the U.S. one in the meantime.)

But what about the following question: Are Americans richer than the Dutch? The average income in the U.S. is about 20 percent higher in the U.S. (again, adjusting for cost-of-living differences). So our inclination may be to answer in the affirmative. But when average incomes do not differ by a large margin, income distributions do matter a lot. It turns out that the answer to the question depends very much on where in the income distribution we look at.

The following chart shows the average incomes of different income groups in the two countries. In each country, population is split into 20 equally-sized groups (“ventiles”), ranked from the poorest to the richest.

The two distributions cross, roughly at the middle. The bottom 40% or so of the population is better off in the Netherlands, especially as we go lower in the distribution of income. The bottom 5% have nearly double the income in the Netherlands. The top 50%, by contrast, are significantly better off in the U.S.

So are the Americans better off than the Dutch? I cannot tell you. But I can say that per-capita GDP or aggregate productivity numbers cannot answer the question.

By the way, these data on income distribution come via Branko Milanovic. Check his book and web page.

And if you want to have more fun comparing income distributions across and within countries, check this puzzle. (The answer is here).

Comments

Americans will definitely be better off than the Dutch once global warming will have risen the sea levels so much that Holland will have disappeared.
Ironically, this will be caused by Americans more than by the Dutch. Unfair.

When you make twice as much but have to work for it three times as long, obviously you are not in a material way "richer".

What I do find curious is that there is a tendency to compare countries like the Netherlands to massive, continent spanning titans like the US. It makes more sense to compare states to countries as small as the Netherlands so that at least the population and geographical area are comparable. It seems to me there is quite a bit for the Dutch to be jealous of when viewed in this light: http://en.wikipedia.org/wiki/List_of_U.S._states_by_GDP

I would very much want to see the details of the incomes in that second chart.

For the US has a strange way, internationally, of measuring the income of the poor. It is, by and large, solely market income (in more detail, market income plus direct cash transfers. But it excludes all transfers in kind and through the tax system. This matters because the majority of US poverty alleviation is done through transfers in kind and the tax system.)

The Dutch system (and pretty much everywhere else) measures poverty and the incomes of the poor after transfers.

So it does rather depend upon what Milanovic has done there. He may have corrected the US figure (I hope he has) so that we are indeed looking at post tax, post benefits incomes.

Or, if he hasn't so corrected then we're looking at US numbers before poverty alleviation and redistribution of incomes and Dutch numbers post.

I'd very much like to know which numbers he's using. Precisely where does this information come from?

Another thing that should be taken into consideration is that, given a specific set of skills one owns or how much one works, where she would be placed in the two distributions. If person A could be placed in top 5 percent in Holland working 8 hours a day, it is not clear she would be in the same category in the United States. This makes the comparison between groups across the two countries more complicated, I believe.

I do agree that per-capita GDP can not help in answering such question. I don't know much about the Netherlands. Would be interesting to look at countries in the Scandinavia, more especially at the time when many Americans despise welfare economic models. One thing I am sure about though is that very few Americans are richer that the poorest Norwegians. You don't even need to look at the GDP weird statistical graphs. You only need to go to Norway an witness for yourself.

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I am really surprised to see that the per capita income of the china is more than that of USA. USA is also growing day by day and I hope USA will beat the china for Per capita incomde in next coming years.

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I won't be so sure that the Dutch could enjoy that as well.

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